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Working The Plan

In my last post which summarized the session I ran at the Momentum Summit, I discussed some of the issues involved in scaling up the sales effort.  In this first in a series of follow-ups, I'm going to cover things to think about in setting up a sales commission plan.

All of my sales management experience has been in high-tech start-ups, including Digital Lumens, which is a mixture of high-tech and cleantech. I don't think that my advice would necessarily apply outside of that environment.

First of all, why do sales people get commission?  Everyone who works at a start-up is expected to work hard, and everyone gets measured by results.  Engineers don't get paid by completed working software modules.  Support people don't get paid by completed support calls.  They work hard and work long hours.  Why do sales people get aggressive incentive compensation, and the others don't?

I don't want to get overly philosophical in this post because some people may argue that everyone should get incentive compensation.  And, in some sense, it's traditional that sales people earn commissions.  The best sales people expect it.  So, it can't be avoided.

The one thing about sales that doesn't apply to most other positions is that it can be measured by the numbers.  Trying hard, making lots of calls, doing lots of demos, working long hours and asking for lots of orders doesn't count.  What counts is getting POs that the company accepts (no crazy terms or pricing, etc.).  So, sales, in one sense, is the easiest to measure and to be subjected to incentive compensation.

Also, in most sales jobs, your work is never done.  There is always one more call to return, one more lead to follow-up on, and one more prospect to check-in with.  The incentive compensation keeps you motivated to continue to chase down every opportunity.

Lastly, the company really needs the sales people to hit their revenue targets. Obviously, everyone's job in a start-up is important.  But, once companies get to the revenue stage, measuring revenue vs. plan becomes one of the first things that a Board does.  So, the CEO, who feels the heat from the Board if the targets are missed, really needs to know that the salespeople are doing everything they can to hit the numbers.

But, what numbers are they trying to hit?  The most important thing about sales compensation planning is to make sure that you are motivating the salespeople to produce what the company needs.  In a single product company, it's pretty straightforward.  The company needs to generate a certain amount of dollars of revenue, and that is divided up among the sales teams.  I'd advocate keeping the sales comp plan very simple so that it can be explained in no more than a few sentences.  The more complicated it is, the more likely that the salespeople will find a way to hit their number that doesn't necessarily help the company hit its number.  If that's not clear, let me know in the comments, and I'll try to come up with a specific example.

There are two related ways that I like to structure simple commissions.  In both cases there is a goal or quota for the sales person.  The easiest way to pay the sales person is to give them a percentage of everything they sell up to the quota and then a higher, accelerated percentage on everything over the quota.  Never put a limit on what a sales person can earn.  If you grossly underestimate the sales potential of your product, rejoice in the fact that the salespeople can sell twice as much as you expected and are making a lot of money this year.  In most sales roles I had, I was the highest paid person at the company.  And, the CEO was thrilled to pay me!

The second similar way to structure these plans is to identify what a salesperson's on-target earnings level is.  If they expect to earn $50,000 in commissions when they are 'on-target', you can structure the plan with a floor (i.e., if they sell less than 50% of their quota, they earn nothing), and an accelerator.  Above the floor, whatever share of quota they achieve becomes their share of the on-target earnings they get.  Above quota, the accelerator kicks in and they get a higher percentage (i.e., with 110% achievement, they get 120% of commissions).

I like the second method better because I don't like people to get attached to a percentage of sales.  As your team and company grows, you'll be splitting territories and readjusting quotas and commission plans.  Someone who starts off earning 1% of sales will eventually get less than that.  But, if you target them for $50K in commissions, you can always adjust your quotas so that they have a chance to earn that.

There are lots of other topics coming up, including the split of salary vs. commission, how to compensate teams when multiple people work on the same accounts, how to structure sales compensation when resellers are involved, and more.  Stay tuned.

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Comments

If you stick to high-tech business-to-business sales then your approach is absolutely correct. There would still be some room to argue, but definitely much much less.

Most of my experience and comments come from high-tech business-to-business sales where there is a sales process that the sales person has to manage. Examples of consumer products, like the iPad, are very different.

My point is not that the salesperson is supreme over all other functions. But, this series is about sales, so it is certainly sales focused. And, I think that there is an overall philosophical question about what level of incentive compensation should be used for non-sales positions. I am in favor of everyone having some level of incentive compensation, but that's a whole different subject.

Mike,

To a certain degree I can understand your reasoning, especially if marketing, customer service and product are all substandard. If the sales process is based on cold calling it is a different cup of tea than having the initial sales process started by others. If sales is using other resources, the use of those resources should be taken into account and I have seen many cases, where it wasn't the sales person that was actually the enabler of the deal. Slow-moving technical and complex product are also different than fast-moving products. At the end it is the combination of many factors that drive sales and the sales person is just one of those many factors. The impact of demand creation should not be underestimated. As an extreme example: Take the iPad: not much sales effort need to sell those (at least for the moment). Apple did an excellent job in demand creation and sales is more order fullfillment than actual hard-core sales.On the opposite side you would find highly complex higher cost items with plenty of competition, where the sales person is much more important. But then again, technical pre-sales will be nearly as important as the sales person.

Christoph,
There is no doubt that a salesperson by himself can't be successful without a good company backing him up. But, I wouldn't recommend compensating a salesperson for sales volume net of marketing, engineering, or support costs. A salesperson may argue that those other departments didn't contribute as much to a particular sale. Or, they may discourage those departments from helping out because they perceive that they can make more money, in the short term, without them. This is a good example of why you have to structure the plan properly.

I prefer compensating the sales people on revenue, but maintaining executive control on pricing. This makes maintaining margins the company's responsibility and not the salesperson's responsibility. If the salespeople find that they can't get crazy pricing approved, they'll stop working on deals involving crazy pricing. And, they'll push for more help from marketing, engineering, and support if they think it will help them close deals. Again, it comes to management to control how those resources are deployed. But, I'd always encourage the sales people to ask for more help rather than less.

Mike,

I agree that sales is one of the key functions, but sales is highly dependent on other departments to be able to grow a customer base and generate sales. Sales commisions should thus not necessarily be based on 100% of the sales volume, but on sales volume minus marketing, engineering and customer service costs. If marketing does a fantatsic job of creating demand and is delivering high-quality leads, it simplifies the sale process. The effort required to sell thus is substantially lower. Customer service a.k.a. tech support is another key to sales, as potential customers try to avoid companies with lousy support. Then of course, there is engineering/product development: Depending on the quality of the product, sales are simpler or close to impossible to accomplish. WIthout good engineering, good customer service and excellent marketing, sales has an extremely hard job. I assume you will suggest that setting a higher sales quota and the split used between salary and commision can take care of that.

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